Working Paper: CEPR ID: DP15267
Authors: Metodij Hadzivaskov; Luca Antonio Ricci
Abstract: This study investigates the relationship between public debt and sovereign credit ratings, using a wide sample of over 100 advanced, emerging, and developing economies. It finds that: i) higher public debt lowers the probability of being placed in a higher rating category; ii) the negative debt-ratings relationship is nonlinear and depends on the rating grade itself; and iii) the identified nonlinearity explains the differential impact of debt on ratings in advanced economies versus emerging and developing economies (previously suggested in the literature as different relationships). These results hold for both gross and net debt, and are robust to alternative dependent variable definitions, analytical techniques, and empirical specifications.
Keywords: credit ratings; public debt; credit rating agencies; financial markets; advanced economies; emerging markets; nonlinearities
JEL Codes: E44; E62; G15; G24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| public debt (H63) | nonlinearity in credit ratings impact (C22) |
| public debt (H63) | stronger negative impact on credit ratings in AEs than EMDEs (F65) |
| increase in public debt (H69) | change in marginal probabilities of credit rating grades (C29) |
| higher public debt (H69) | lower probability of better credit rating category (D80) |
| higher public debt (H69) | decline in credit ratings (F34) |